What is Total Revenue? Total revenue, also known as gross revenue or total sales, is one of the most important aspects of any business. It is the amount you get before deducting all the business expenses. Hence it is different from the profit earned in a business. Total revenue may also include the dividends and interests from some companies' investments.
Did you know?
Total revenue is a critical metric that allows businesses to make crucial decisions. It helps companies determine how their current strategies are faring, cash runway and budgeting.
Also Read: Revenue Expenditure: Definition, Types & Examples
How to Calculate Total Revenue
To check the position and amount of total revenue in the business, one should check the top of an income statement. The first section of an income statement shows the total money (gross revenue) brought into the business during a particular accounting period. This gross revenue or total revenue includes your primary source of income and other sources of income. This revenue recognition also depends on the accounting method that your business uses.
Then comes the 'Cost of Goods Sold (COGS)', which means the total cost incurred to produce the number of goods during the accounting period. After deducting COGS from the total revenue, you get the 'gross profit'.
The operating expenses are those expenses that you incur in a particular period, and it includes all the day-to-day costs that an organisation spends to run the business. After deducting operating expenses from gross profit, you get the 'net profit' or 'profit' earned for the accounting period. Each metric has its value to the businesses, profit being their chief.
The Total Profit formula is stated as = Total Revenue - Total Expenses
Importance of Calculating the Total Revenue
Any business needs to keep track of their total revenue to track the growth of their business. There are many importances to monitoring the total revenue of the company. They are as follows:
- To evaluate your business's financial status.
- Address the problems of the business and whether any improvement is required.
- If the gross revenue is less, adjustments in pricing or sales strategies are needed.
- Is the demand getting fulfilled, or do they have to expand production?
Total Revenue vs Net Revenue
There is a significant difference between Total Revenue (Gross Revenue) and Net Revenue.
You need to check on both gross revenue and net revenue to follow the financial health and profitability of the business. The gross revenue tells you the ability of your business to generate revenue, while the net revenue considers the business expenses. Many of these expenses are also one-time fees.
Also Read: What is the Difference Between Gross Profit & Net Profit?
How to Increase Total Revenue in a Business
- Focus on the past strategies that work for you - Compare the elements primarily responsible for more revenue in the business. Focus on increasing their production or try to meet their sales demands more. These comparisons can also be made by building financial models or forecasting different scenarios.
- Think for the Short and Long-term - You can increase your gross revenue by offering discounts and incentives to customers in the short run. These tactics may be helpful for short-term sales generation, but you need to think for the long-term too. Prepare budgets and different financial analyses for long-term goals.
Total Revenue Formula
It is essential to know about total revenue in business and economics to measure its success. Total revenue may vary in different contexts, from Total Revenue in Economics to the Total Revenue in Accounting.
Total Revenue in Economics
It refers to the total receipt received from the sale of a given quantity of goods or services. It is calculated by multiplying the number of goods sold with the price of goods sold. In economics, this total revenue contains two other essential elements - Average and Marginal Revenue.
Average Revenue refers to the revenue earned per unit of output sold. By dividing the Gross Revenue by the number of units sold, you get the Average Revenue. At the same time, Marginal Revenue means the additional revenue earned from selling an additional output unit.
Total Revenue in Accounting
Calculating Total Revenue for accounting purposes is similar to that of Economics. However, there is no concept of average or marginal revenue here. Here, there is a requirement to find out the net revenue and net profit after the computation of Gross Revenue:
Total Revenue/Gross Revenue/Total Sales = Number of units sold*Cost/Average Price per unit
You can use this formula to calculate the gross revenue for both goods and services. If you are a service-based business organisation, replace the formula as:
Total Revenue/Gross Revenue/Total Sales = Number of services sold * Cost/Average Price per service
Sometimes, a business may have more than one product or service. In that case, you need to find out the gross revenue of each item separately and add them up together. Large and medium scale businesses are using accounting software to calculate the total sales of their business instead of manual calculations.
After computing the Gross Revenue, you may use it to find additional financial figures. You can determine whether your business had a year-on-year increase in gross revenue, which will help you figure out whether it is a continuing operation.
Examples of Calculating Total Revenue
The calculation of Total Revenue can be understood better with the help of an example:
Example 1
Let us assume that you have a bakery business. You have two products - cakes and muffins. The average price of the cake is ₹300 and the total number of cakes sold in the last accounting year was 3000. The average price of the muffin is ₹30, and the total number of muffins sold in the previous accounting year was 4000. Calculation of the Total Revenue of the bakery business is as follows from the Total Revenue formula:
Calculation: Total Revenue = Number of goods sold*Average price per unit
- Cake:- 3000*300 = ₹9,00,000
- Muffin:- 4000*30 = ₹1,20,000
Total revenue of the bakery business = ₹9,00,000 + ₹1,20,000 = ₹10,20,000
Example 2
Let us now assume that you are a service-based business organisation. You charge ₹300 per hour of consulting, and you worked for approximately 40 hours per week last year.
Calculation: Total Revenue = Number of hours of service provided for the year * Average consulting fee per hour
Assuming there are 52 weeks in the last accounting year, the calculation is as follows:
Yearly gross revenue = 300* (52*40) = ₹6,24,000
You may also set a target of earning a certain amount of revenue. If the target is not met, you may increase the price of one unit during the latter half of the accounting period.
Conclusion
It may be concluded that calculating the total revenue is not a complicated process. You have to keep track of all your sources of income, and they are an essential element of your business during any accounting period. You may also take the help of an expert or any software if you have any trouble computing your business's gross revenue.
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